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Posted: November 01, 2013

Energy: Gushing fruit

Surging oil and gas production has far-reaching economic impact

Lee Buchsbaum

The marriage of multi-stage hydraulic fracturing and horizontal drilling techniques has unleashed a veritable gusher of oil and natural gas in Colorado. With more than 51,000 wells, the state ranked fifth in the nation for gas and ninth for oil production in 2011. Last year, Colorado’s producers set records as they extracted almost 50 million barrels of crude and 1.7 million cubic feet of natural gas from the state’s rich oilfields.

Historically a significant part of Colorado’s economy, the industry today provides substantial economic benefits throughout the state due to its integrated supply chain, high-paying jobs – often in otherwise agriculturally dependent rural areas – and its national and global reach.

According to an influential economic study conducted by the University of Colorado Leeds School of Business, in 2012 Colorado’s oil and gas industry recorded $29.6 billion in production value, accounting for some 29,300 direct drilling, extraction and support jobs with average annual wages in excess of $101,000. Combined with the oil and gas supply chain – transportation, trucking, refining, wholesalers, parts manufacturers and gasoline stations – direct employment totaled more than 51,200 jobs.

Total industry employment, a number derived from direct, indirect and induced figures, was estimated at 111,476 in 2012. Core oil and gas jobs and related employment accounted for about 1.9 percent of total state employment in 2012, surpassing the 2008 peak. These jobs pay almost 50 percent more than the state average for all other industries. Collectively the industry contributed slightly more than $3.8 billion in employee income to Colorado households in 2012, or 2.8 percent of total Colorado salary and wages.

One of the most profitable industries on the planet, oil and gas is also subject to taxes and assessments often beyond what other industries contribute. Severance taxes (based on how much oil and gas is extracted) paid by the industry totaled $163 million in 2012. The industry’s severance taxes, public leases, public royalties and property taxes contributed substantially to state and local revenues in 2012 – totaling nearly $1.6 billion. Last year, the state received almost $80.7 million in state lease revenue from oil and gas – a record high. Combined, “oil and gas contributed over 8 percent of the general fund,” said Tisha Schuller, president and CEO of the Colorado Oil and Gas Association trade group.

Journeying into regions like Weld County, it is worth noting the sheer amount of infrastructure in the vicinity. With more than 20,550 producing wells it is both the most productive county in the state and nation. With billions already invested, leading producers like Noble Energy and Anadarko Petroleum Corp., along with others, have publicly committed more than $10 billion in future capital expenditures within the next decade.

“Never mind what’s already in place. This is more revenue, jobs and production,” Schuller said. “Going forward, the more infrastructure that’s installed, the more environmentally friendly you can be. You can use pipelines instead of trucks. Producers can recycle more water and create additional efficiencies to better use the space. We see this more in the mature and developed Piceance production fields on the Western Slope where operators are recycling almost 100 percent of all used water.”

Natural gas alone is used as a feedstock for fertilizers, chemicals and plastics. But cheaper gas used to make electricity has led to lower energy prices, that in turn have reduced power costs for manufacturers.

In another recent study, Englewood-based global information and energy consulting firm IHS forecasts that cheap natural gas prices will support more than 460,000 combined manufacturing jobs (3.7 percent of all manufacturing jobs) by 2020, rising to nearly 515,000 (4.2 percent of total manufacturing jobs) in 2025.

In its report, America’s New Energy Future: The Unconventional Oil and Gas Revolution and the Economy – Volume 3: A Manufacturing Renaissance, IHS’ study states that “the manufacturing sector will become increasingly connected to unconventional development as a primary source to create and sustain jobs. Manufacturing jobs will represent one out of every eight jobs supported by unconventional oil and gas development during that time.”

Along with significant job-creation and other economic impacts “from energy production and its extensive supply chains, the growth of long-term, low-cost energy supplies is benefiting households and helping revitalize U.S. manufacturing, creating a competitive advantage for U.S. industry and for the United States itself,” according to Daniel Yergin, IHS vice chairman and author of “The Quest: Energy, Security and the Remaking of the Modern World.” According to IHS, energy-intensive industries such as petroleum refining, aluminum, glass, cement and the food industry are some of the primary beneficiaries from the recent fracking boom.

As more natural gas is extracted, new markets beckon. Recently several Colorado producers announced plans to build or expand existing liquid natural gas facilities to prepare gas for international export. Worldwide, gas prices are much higher than in the U.S., largely because of increasing domestic supplies. Though some manufacturers fear they will get squeezed as prices rise to meet international benchmarks, other recent studies counter that concern.

A report commissioned by the Energy Department and prepared by NERA Economic Consulting concluded that the “U.S. would experience net economic benefits from increased liquefied natural gas exports,” with projected gains in new economic activity and revenue from foreign sales outweighing modestly higher energy prices and damage to some industries. LNG exports could bring in annual revenues ranging from $2.6 billion to $32.9 billion and cause the gross domestic product to increase by $4.4 billion to $47 billion in 2020, NERA reported. Ultimately, the study suggests that these broad economic benefits will trump any slightly higher energy costs.

Closer to home, in the not too distant future, Colorado consumers will be able to fill their cars with Compressed Natural Gas (CNG) instead of gasoline or diesel fuel. Already adopted by some long haul truckers, the technology is still more efficient for vehicle fleets than individuals.

Colorado currently has 16 CNG stations in nine cities, mainly in regions with high natural gas production. With so much natural gas available in the state, Gov. John Hickenlooper’s Colorado Energy Office recently commissioned a study of three vehicle fleets – Denver International Airport, Republic Services and the City of Grand Junction – to determine the viability of CNG for users and fleet operators statewide.

The study concluded that fuel savings from CNG deployment can be significant – Republic alone achieved almost a 50 percent cost reduction. Going forward, if natural gas remains this cheap and plentiful, prepare to pump real gas into your CNG-fueled vehicle in the near future.

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